RISK ASSESSMENT

Growth is firming thanks to exports

Despite Hurricanes Ava and Eliakim, growth strengthened in 2018, supported by exports – particularly agricultural exports (vanilla, which accounted for a third of exports in 2017) –, and public investment as part of the National Development Plan (NDP). In addition to the vanilla segment, the secondary sector is also expected to remain dynamic thanks to the increase in nickel exports, as well as textile exports from special economic zones (which continue to benefit from robust external demand under the AGOA regime). Despite the political change, public investment is expected to continue to increase in 2019, particularly to improve the road network, with the aim of opening up the rural areas of the country. This investment should therefore support the construction and transport sectors. At the same time, private investment could continue to increase, thanks to the establishment in 2017 of a legislative framework for PPPs. The positive outlook for the agricultural sector, which employs nearly 75% of the population, should be favourable to household consumption, thus benefiting trade activities. Service sectors could also be supported by tourism and advances in internet bandwidth, which allow ICT to develop. Better crop yields are also expected to reduce inflationary pressures.

The twin deficits are widening under the weight of investment

Under an IMF programme since 2016, the country is expected to continue to consolidate its public finances. Nonetheless, despite the efforts undertaken, the government deficit widened in 2018. Increased revenues related to the economic recovery failed to offset the one-off expenses incurred by the authorities to respond to problems affecting the national water and electricity company (Jirama) following Hurricane Ava. However, the structure of public finances has changed. Current expenditure has been cut, leaving more fiscal room for manoeuvre to raise investment expenditure, which remains largely financed by international donors. The World Bank has earmarked USD 75 million to improve urban infrastructure in Greater Antanarivo, and the African Development Bank is expected to free up USD 11 million to support five projects under the NDP. In 2019, the government deficit is set to widen further. The new government is expected to deviate only slightly from the budgetary path set by its predecessor, although an increase in public spending is expected. Public debt, which is mainly concessional, is expected to continue to grow but will remain sustainable.

The increase in the trade deficit combined with the decline in transfers caused the current account deficit to widen in 2018, after two years in balance. Exports remained on a positive trend in 2018 but continue to be concentrated around three products – vanilla, nickel and textiles –, making them vulnerable to price and demand fluctuations. In 2019, the price of vanilla should remain high, but the soaring prices are expected to moderate due to a better Malagasy harvest, which represents 80% of world production. Nickel exports, meanwhile, are set to continue to benefit from favourable world prices. Imports of capital goods for public investment are expected to continue to drive imports up, widening the current account deficit. That said, strong export earnings in the previous two years have allowed the central bank to replenish its foreign exchange reserves, which now stand at more than four months of imports.

Andry Rajoelina wins the duel of the former Presidents

According to the results of the electoral commission, Andry Rajoelina, president from 2009 to 2014 following the political crisis of 2009, emerged as the winner of the second round of the presidential election held on December 19, 2018, against his predecessor, Marc Ravalomanana. Despite the appeals filed by the latter, Mr Rajoelina should succeed Héry Rajaonarimampianina, eliminated in the first round, as head of state. Despite protests, accusations of fraud and the shadow of the 2009 crisis in the duel between Mr Rajoelina and Mr Ravalomanana, the electoral campaign was relatively peaceful in a country regularly marked by post-election crises. The new president will have to face the country’s persistent socio-economic challenges, notably poverty, corruption and infrastructure deficits. The latter two factors contribute to a difficult business environment, as evidenced by the country’s 161st place in the 2019 Doing Business ranking (out of 190 countries ranked).